under the spotlight: the transition of environmental risk management
TRANSCRIPT
Under the spotlightThe transition of environmental risk management
An Economist Intelligence Unit reportsponsored by
ACE, KPMG, SAP and Towers Perrin
The Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide.
The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.
About this researchThe Economist Intelligence Unit surveyed 320 executives around the world in March 2008 about their attitudes to environmental risk management. The survey was sponsored by ACE, KPMG, SAP and Towers Perrin.
Respondents represent a wide range of industries and regions, with roughly one-third each from Asia and Australasia, North America and Western Europe.
Approximately 50% of respondents represent businesses with annual revenue of more than US$500m. All respondents have influence over, or responsibility for, strategic decisions on risk management at their companies.
The Economist Intelligence Unit’s editorial team conducted the survey and wrote the paper. The findings expressed in this summary do not necessarily reflect the views of the sponsors. Our thanks are due to the survey respondents for their time and insight.
Copyright© 2008 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited.
All information in this report is verified to the best of the author’s and the publisher’s ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.
© The Economist Intelligence Unit 2008 1
Under the spotlightThe transition of environmental risk management
There is a growing consensus that business should bear a greater responsibility towards the environment and pay closer attention to the
�externalities� that its activities create. Non-governmental organisations, customers, govern-ments and investors have all begun to scrutinise the activities of business more carefully and demand a more responsible and sustainable approach. In response, the business community has implemented corporate social responsibility programmes with the aim of improving its social and environmental behaviour and portraying itself as a more responsible member of society.
External pressure to improve environmental per-formance has coincided with a trend towards
increased complexity in business. A successful compa-ny now depends on an intricate web of global supply chains and partner networks, while an international reach � through alliances, acquisitions and greenÞ eld investments � has become a prerequisite for growth.
Given these two parallel trends of greater business complexity and scrutiny into environmental perform-ance, it was only a matter of time before companies would seek a more rigorous way of identifying and assessing their environmental liabilities, and of man-aging the risks associated with them in a more coher-ent manner. Companies now seek greater visibility not just of their own activities, but of those that take place in countries to where they have outsourced manufacturing, logistics or assembly. In addition, as organisations increasingly seek overseas acquisitions to further expansion plans, there has been a growing realisation of the need to scrutinise environmental performance of target companies more carefully as part of their due diligence processes.
But while the general trend is towards a more rigorous evaluation of environmental risk, this is by no means universal. Many companies have only just embarked on this journey and have a long way to go before they reach their destination. In order to assess the extent to which environmental risk management has become part and parcel of modern business strat-egy, the Economist Intelligence Unit conducted a survey of senior professionals with responsibility for risk on behalf of ACE, KPMG, SAP and Towers Perrin. From this survey, a number of key Þ ndings emerge:
Environmental risk management is frequently managed in an ad hoc fashion. For a number of years, the trend in risk management has been towards a formal, co-ordinated and consistent
Executive Summary
Key points from the survey:
1) Environmental risk management is frequently managed in an ad hoc fashion.
2) There is no clear consensus about who should be responsible for environmental risk.
3) Many companies conduct strategic activities without a formal assessment of environmental risk.
4) Respondents see compliance with environ-mental legislation as a key strength.
5) Managing environmental risks associated with suppliers and partners is a key area of weakness.
6) Better reputation with customers and inves-tors is seen as the main benefit of environmental risk management.
7) Climate change is an opportunity as well as a risk.
8) Lack of certainty � about the impact of environ-mental liabilities and the future scope of legislation � are the main obstacles to effective environmental risk management.
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Under the spotlightThe transition of environmental risk management
approach that aggregates all categories of risk at the enterprise level. Yet for many companies, envi-ronmental risk management seems to have escaped this trend. One third of respondents say that they manage environmental risk in an ad hoc manner, while 31% say that they manage it in a co-ordinated way as part of an overall risk management frame-work. Just over one-quarter say that they manage it in a co-ordinated way, but separately from the main risk framework, while one in ten says that they do not manage environmental risk at all.
This Þ nding suggests that, despite media, investor and regulatory scrutiny of environmental performance, this category of risk has still not be-come part and parcel of the main risk management agenda. Parallels can be drawn with the corporate social responsibility movement in general: initially seen by many companies as an extension of their public relations department, it gradually assumed greater importance and has now, for many compa-nies at least, become a central strand of corporate strategy. One might expect environmental risk management to make a similar transition over the coming years.
There is no clear consensus about who should be responsible for environmental risk. In previous surveys in the Global Risk Briefing series � for exam-ple on reputational risk � there has been widespread agreement that a board-level executive, and usually the CEO, should assume ultimate responsibility for managing that risk. But in the case of environmental
risk management, there is no such consensus. Just under one-quarter of respondents say that the chief executive is responsible, and just under one in five cite the chief risk officer as having ultimate sway. But beyond these two senior executives, the range of responses given is extremely wide. At 14% of respond-ent organisations, no one has overall responsibility for environmental risk, while 17% leave it to regional directors, heads of business unit or line managers.
This Þ nding suggests that the management of en-vironmental risk is often decentralised and that many organisations lack a bird�s eye view of their exposure to the threats they face and their cumulative liabili-ties. This piecemeal approach may enable companies to identify isolated problems, but without oversight it will be difÞ cult for them to obtain an overall picture of the risks they face.
This is not to say that it is impossible for manage-ment of this risk to be delegated to a layer below board level. With clear lines of responsibility and accountability, along with the ear of a top execu-tive should it be required, this approach may well be sufÞ cient. There are likely to be problems, however,
In an ad hoc way
In a co-ordinated way as part of an overall risk management framework
In a co-ordinated way, but separate to the overall risk management framework
Not at all
How is environmental risk managed in your organisation? Please select the answer that is most appropriate.(% respondents)
33
31
26
10
Chief executive officer
No one has overall responsibility
Don’t know
Who in your company has overall responsibility for managing environmental risks? (% respondents)
24
Chief risk officer19
Chief sustainability/corporate social responsibility officer10
Chief legal officer/general counsel3
Chief financial officer4
Heads of business units12
Regional directors3
Line managers2
14
7
Other, please specif3
© The Economist Intelligence Unit 2008 3
Under the spotlightThe transition of environmental risk management
if responsibility is decentralised or left to a depart-ment or regional head who does not have visibility into other areas of the business. The lack of a process to communicate problems to the board will also cre-ate difÞ culties because, without such a structure in place, executive management cannot have conÞ dence that information about serious risks is being passed up the chain to them.
Many companies conduct strategic activities with-out a formal assessment of environmental risk. Blind-spots in the risk management of partners and suppliers have the potential to cause serious reputa-tional damage. Although such a task is by no means easy, careful scrutiny of the practices of partners and suppliers has become essential to prevent problems from taking place.
According to our survey, however, a high propor-tion of companies do not conduct a formal assessment of environmental risk when undertaking a wide range of strategic activities, including the selection of part-ners or suppliers. Just 41% say that they conduct such an assessment when developing new products and services, 32% when selecting partners or suppliers, 26% when planning geographical expansion and just 19% when planning mergers and acquisitions. Figures
are slightly higher for manufacturing and heavy industry � for example, 52% of energy and natural resources companies conduct such an assessment when developing new products and services � but the numbers are not strikingly different. Given the poten-tial scale of environmental liabilities that companies might face, and the reputational damage that can be caused by poor consideration of these issues, these Þ gures seem surprisingly low.
The survey also looked speciÞ cally at aspects of environmental risk management undertaken when respondents are planning an acquisition. Again, there is only limited use made of formal due diligence processes, such as assessing environmental liabilities of the target company or its compliance with environ-mental legislation. Indeed, 37% of respondents say that they conduct none of the activities put forward in the question when planning an acquisition.
One aspect that the survey does not capture is the extent to which, having selected a supplier or partner or sealed an acquisition deal, companies monitor environmental risk on an ongoing basis. The suspicion has to be that, with so few companies conducting formal assessment of environmental risk when they embark on these activities, even fewer will keep track of these risks on a regular basis once the due diligence period is complete. Clearly, both are essential if the management of these risks is to be effective over the long term.
Developing new products and services
Marketing new product or service
Selection of suppliers and partners
Selecting new business location
Planning geographical expansion
Planning market expansion
Planning mergers and acquisitions
None of the above
In which of the following business activities does your company conduct a formal consideration of environmental risk? Select all that apply.(% respondents)
41
32
32
28
26
23
19
21
Formal due diligence to assess environmental liabilities
Formal assessment of compliance with environmental legislation
Assessment of long-term liabilities related to climate change
Formal assessment of environmental exposure within supply chain
None of the above
When planning an acquisition, which of the following steps do you take to evaluate environmental exposure of your target? Select all that apply.(% respondents)
38
35
21
19
37
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Under the spotlightThe transition of environmental risk management
Supply chains and the environmentA recent Economist Intelligence report entitled Doing Good: Business and the Sustainability Challenge identified the supply chain as being an area of particular weakness for companies seeking to improve their sustainability per-formance. The problem is one that has plagued companies for decades � it is very difficult to obtain clear visibility into practices carried out by external companies, and responsibility for environmental performance in these outsourcing relationships is often blurred. For example, a company might consider that, because it has outsourced logistics or manufacturing, the partner company should be responsible for ensuring that environmental problems do not arise, and for dealing with the fall-out should an accident occur. In theory, that may be true but, from a reputational perspective, the media, pressure groups and customers will be unlikely to draw a distinction between activities conducted by a supplier and the parent company.
Businesses increasingly realise this and are making greater efforts to scrutinise the environmental performance of their suppliers and partners. But many companies are still at the early stages of their journey to improve visibility into the supply chain and there continue to be weaknesses that have yet to be addressed.
One of the difficulties is ownership of supply chain risks that are related to the environment. Just as responsibility for environmental risk is often decentralised, so too supply chain risk suffers from
a similar problem. The complex, highly distributed nature of supply chains and partner networks fosters a decentralised approach � even if this is inappropriate. As with environmental risk, then, companies should pay careful attention to lines of responsibility and accountability for supply chain issues.
Asked how successfully they manage aspects of environmental risk related to their supply chain, respondents tend to perform most successfully at those aspects that are either regulated or for which they will be seen to have clear responsibility if things go wrong. For example, just over half think that they are successful at managing issues related to water pollution, the transportation of hazardous waste or chemicals, or the potential use of toxic and hazardous substances in manufacturing.
In most countries, all three activities are closely regulated and hence it is compulsory for companies to pay attention to these areas. Moreover, an accident related to a spill of hazardous substances, water pollution or the use of toxic chemicals in manufacturing is specific and can be directly traced back to the company that is responsible. An oil tanker that runs aground, the use of lead paint in products, or the pollution of a town�s water supply by a factory are all directly attributable to the offender. As a result, these are areas that companies need to monitor extremely carefully, as the reputational implications of such environmental risks are substantial.
3715
477
4012
428
3211
384
216
328
304
(% respondents; Charts shows responses 1 and 2 on scale only)
How successfully does your company manage the following environmental risks related to its supply chain?Rate on a scale of 1 to 5, where 1= Very successfully and 5=Not at all successfully.
Emissions from transportation
Emissions from factories, warehouses and other facilities
Disruption to supply chain from extreme weather events
Impact of manufacturing or other operations on local communities
Water scarcity
Air pollution
Transportation of hazardous chemicals or waste
Water pollution
Potential use of toxic/hazardous substances in manufacture
Very successfully Successfully
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Under the spotlightThe transition of environmental risk management
Respondents see compliance with environmental legislation as a key strength. Asked how success-fully they thought they managed different aspects of environmental risk, respondents considered that dealing with environmental regulations was their key strength. Just over half of respondents thought that they performed this activity either successfully or very successfully.
The complexity of environmental legislation and the lack of regulatory harmonisation between regions makes compliance a difÞ cult and costly task. In seeking to comply with legislation within each of the jurisdictions in which it operates, a company will require multiple, national compliance teams
with speciÞ c expertise and training. This process requires considerable resources from which it is dif-Þ cult to derive economies of scale.
Yet is it interesting to note that companies see their key strength as the one aspect of environ-mental risk that is compulsory � other areas that are voluntary, but where competitive advantage may more easily be gained, are less well developed. For example, companies may not be compelled to improve their energy efÞ ciency, but to do so can create sustained competitive advantage in terms of greater operational efÞ ciency over those companies that have not yet considered this course of action.
The areas where companies say that they perform less well are those that might be considered general, and for which no direct responsibility can be assumed by an individual company. The biggest weakness, according to respondents, is the management of disruption to the supply chain from extreme weather events. Not only are these events external and unpredictable, they affect all companies in the vicinity and, usually, no company can be singled out for handling the crisis poorly.
Equally, just one-third of respondents say that they manage emissions from transportation successfully. Again, this is a general issue � while collectively, emissions might cause major problems in terms of pollution and climate change, no single company can be identified as a major culprit. There is therefore less incentive to make improvements to performance in terms of emissions � doing so tends to be done either to improve the efficiency of operations or to demonstrate corporate social responsibility to customers.
In the absence of strong incentives to improve performance, areas that depend on collective responsibility are best addressed by regulation. Without the obligation of compliance, the potential for �free riders� to take advantage of the actions of others is too great.
This is not to say, however, that companies are not thinking about these general problems. Asked about the initiatives they were taking to improve the management of environmental risk in the supply chain, respondents cite the use of more fuel-efficient vehicles
as their number one priority (although it is notable that, in all cases, only a small minority of respondents was undertaking any of these initiatives). This finding suggests that some companies have recognised that fuel efficiency in the supply chain is an area that needs improvement � and that it is one where modifications can have a positive impact on the bottom line.
Use of more fuel-efficient vehicles
Collaboration with logistics providers
Defined risk indicators / risk thresholds for environmental risk withinthe supply chain
Implementing third-party audit of suppliers and partners
Use of route optimisation technology
Made formal assessment of interdependencies of environmental riskacross the supply chain
Introducing redundancy into supply chain
Increased use of "nearshoring"
Relocation of factories, warehouses and other businesses
Implemented formal process to assess environmental liabilities withinthe supply chain
Mandating suppliers to disclose carbon footprint
What is your company doing to improve the management of its supply chain in light of these risks? Select all that apply.(% respondents)
20
16
14
13
13
11
9
8
8
8
7
6 © The Economist Intelligence Unit 2008
Under the spotlightThe transition of environmental risk management
Managing environmental risks associated with suppliers and partners is a key area of weak-ness. The main weaknesses of environmental risk management, according to respondents, seem to centre around dealing with partners and the sup-ply chain. Less than one quarter of respondents consider themselves to be successful at optimising the supply chain to increase energy efficiency and just over one quarter consider themselves to be suc-cessful at due diligence of partners� and suppliers� environmental performance. Given the complexity of today�s supply chain and the interconnected web of partner organisations that support most busi-nesses, this is perhaps not surprising. The finding suggests, however, that more needs to be done to assess these liabilities which, from a reputational point of view, will be perceived as being the respon-sibility of the parent company as well as the sup-plier. A supply chain or partner network is only as strong as its weakest link; it is therefore imperative that companies scrutinise their relationships to assess where potential faults may lie.
Better reputation with customers and investors is seen as the main benefit of environmental risk management. The survey provides a clear indication that companies see an enhanced reputation with cus-tomers as the key benefit of effective environmental risk management. Almost six in ten said that this was one of the main benefits to be gained � a considerable margin ahead of better reputation with investors, which was cited by 30%.
Companies that operate in consumer markets have recognised the need to burnish their environ-mental credentials for a number of years. In the UK, the Plan A initiative operated by retailer Marks & Spencer (so called because the company says there is no Plan B), which commits the company to numerous environmental and ethical principles, provides a good example of a strategy that poten-tially has the outcome of strengthening reputation in this way.
Consumers may select a brand in part on the basis of its environmental credentials, but busi-ness-to-business customers may be less inclined to
257
215
316
194
2111
185
349
2811
3714
3011
3613
(% respondents; Charts shows responses 1 and 2 on scale only)
How successfully do you think your company manages the following aspects of environmental risk?Rate on a scale of 1 to 5, where 1= Very successfully and 5=Not at all successfully.
Identifying environmental liabilities
Assessing scale and scope of environmental liabilities
Dealing with environmental regulations
Exploiting opportunities arising from changing public perception of environmental issues
Increasing energy efficiency
Applying hedging contracts to transfer environmental risks
Reporting on environmental performance to investors
Optimising supply chain to reduce carbon emissions
Understanding impact of climate change on business locations
Due diligence of partners' and suppliers' environmental performance
Decisions over environmental risks to bear, transfer or manage
Very successfully Successfully
© The Economist Intelligence Unit 2008 7
Under the spotlightThe transition of environmental risk management
do so. As mentioned in an earlier Þ nding, less than one third of companies say that they consider envi-ronmental issues when selecting a partner or sup-plier. With these relationships, it seems, it is still the core metrics of cost, service and performance that matter most. In addition, business to business relationships are generally more long-term and tied into contracts. This means that, unlike a retailer that can measure an upswing in sales as the result of a high-proÞ le environmental initiative within a matter of days, B2B companies must wait longer to assess the results of such an approach.
This is not to say, however, that environmental performance will not become a more important consideration in business to business relationships. As scrutiny by customers, regulators, employees and others intensiÞ es, companies will Þ nd them-selves having to pay more attention to the environ-mental performance of their suppliers. Moreover, it is likely that good environmental performance and reporting will come to be seen as a proxy for good overall management � and that in itself will prove attractive for potential customers.
Despite this apparent focus on customers as the driving force behind environmental risk manage-ment, it is interesting to note that, when asked about the stakeholders who were exhorting compa-nies to improve their performance in this area, they come some way down the list. Respondents say that the main force behind the initiative is executive management, followed by regulators and govern-ment. Customers come fourth on the list � again providing evidence that compliance is frequently the main driver behind more effective environmen-tal risk management.
The second biggest beneÞ t of effective environ-mental risk management � although it scores well behind reputation with customers � is enhanced reputation with investors. Certainly, investors are becoming more interested in environmental risk. Shareholder resolutions Þ led against companies to protest at some aspect of environmental performance are becoming more commonplace � according to a December 2006 article in the Harvard Business Re-view, there were 360 resolutions Þ led around corpo-rate social responsibility issues in 2005. There is also
Better reputation among customers
Better reputation among investors
New business opportunities
Greater operational efficiency
Enhanced competitive positioning
Improved shareholder value
Stronger ability to attract and retain employees
Improved relations with regulators
Increased profitability
Reduction in overall carbon footprint
Enhanced ability to influence government policy
What are the biggest benefits that your company expects to derive from more effective environmental risk management? Select up to three.(% respondents)
59
30
28
27
27
20
18
18
17
12
11
Executive management
Regulators
Government
Customers
Employees
Non-governmental organisations
Investors
Local communities
Non-executive management
Partners and suppliers
Which of the following stakeholders currently exerts the most pressure on your company to improve environmental risk management? Select all that apply.(% respondents)
23
15
13
11
9
8
8
7
5
1
8 © The Economist Intelligence Unit 2008
Under the spotlightThe transition of environmental risk management
a growing interest in reporting that takes account of these metrics, as evidenced by the Global Reporting Initiative, a voluntary sustainability reporting frame-work, which has been adopted by more than 1500 major companies since it was launched in 2002.
Yet despite these trends, investors do not seem to be exerting huge pressure on companies to address their environmental risk management, according to our survey. They trail behind most other stakeholders at seventh place on the list. Even when segmenting the results to consider only board-level respondents, who are most likely be in the Þ ring line for wrath from shareholders, inves-tors continue to lag behind most other stakehold-ers. Looking at the larger companies in the survey, however, investors do feature more prominently. Greater scrutiny from investors, it seems, is far more likely to come with size.
Climate change is an opportunity as well as a risk. There is a widely held view that, while climate change could have a devastating effect on economic growth and the business community at large, there will be new and emerging opportunities associated with society�s efforts to address the problem. One company�s risk is an another�s opportunity, and so it is with climate change, according to our respond-ents. Asked to rate the significance of opportunities and risks associated with climate change, 44% saw the risks as significant but a slightly higher propor-tion of 49% saw the opportunities as significant.
For Þ nancial services companies, for example, the trading of permits to emit carbon as part of the Euro-pean Emissions Trading Scheme has created a buoyant
new commodity market. Energy companies, mean-while, have opportunities to develop new sources of energy that are less dependent on fossil fuels � the styling of BP as �Beyond Petroleum� is a striking ex-ample of that particular company�s long-term inten-tions. And automotive companies have opportunities to develop new, low-emissions engines, just as Toyota has done so successfully with its Prius hybrid model.
Lack of certainty � about the impact of environmen-tal liabilities and the future scope of legislation � are the main obstacles to effective environmental risk management.
Asked about the factors that stood in the way of more effective environmental risk management,
7
9
17
17
27
32
34 14
26 15
(% respondents)
How significant does your company view the opportunities and risks associated with climate change?Rate on a scale of 1 to 5, where 1= Very significant and 5=Not at all significant.
Opportunity
Risk
1 Very significant 2 3 4 5 Not at all significant
Lack of certainty about impact of environmental liabilities
Lack of regulatory harmonisation between regions
Cost of managing environmental risks
Difficultly establishing benchmarks of key performance indicators
Constantly changing regulations
Tendency for issue to be overly emotive
Potential for liabilities to be hidden within supply chain
Complexity of supply chain/partner relationships
Lack of awareness among employees of liabilities
Commitment from senior management
Lack of awareness among employees of legislation
Uncertainty over carbon price
Which of the following factors most hinder your ability to manage environmental risk? Please select up to three.(% respondents)
35
34
30
28
23
20
19
18
18
18
15
10
© The Economist Intelligence Unit 2008 9
Under the spotlightThe transition of environmental risk management
two issues stood out. First, respondents feel that they lack certainty about the potential impact of environmental liabilities, and second, they are con-cerned about the lack of international regulatory harmonisation.
At their heart, these two issues are concerned with a lack of certainty. If we look at the top three risks cited by respondents for which they face po-tential environmental liabilities � extreme weather events, the potential impact of climate change over the long term and water scarcity, it is clear that the timing and scale of these threats is inherently unpredictable. Faced with such a high degree of uncertainty, and the huge challenge of quantifying these threats, it is perhaps unsurprising that envi-ronmental risk management remains at a relatively early stage of its development.
The lack of regulatory harmonisation around environmental risk management also creates un-certainty for companies. The current Kyoto Protocol on climate change expires in 2012 and there is, as yet, no successor. Although in Europe, the emis-sions trading scheme is certain to continue in some shape or form, it remains unclear whether the scheme will broaden to encompass more industries and countries, or whether the US, China and India will sign up to a similar cap-and-trade approach. Without the policy steers that they need to set long-term strategy, and with divergent approaches being taken to regulation in different parts of the world, it inevitably becomes difÞ cult for compa-nies to manage environmental risk coherently on a global platform.
10 © The Economist Intelligence Unit 2008
Under the spotlightThe transition of environmental risk management
Conclusion
! Companies should ensure that environmental risk is managed in a co-ordinated way and forms part of their overall risk management framework. The survey suggests that too many companies are managing environmental risk in an ad hoc manner. If the activ-ity is to be successful, it must be considered as part of the overall risk management strategy and not man-aged as a separate process only when problems arise.
! Executives should put in place clear lines of respon-sibility and ensure that a senior person has respon-sibility for this risk. Only a minority of companies in our survey hand responsibility for environmental risk to the chief executive of chief risk officer. All too often, it is delegated to regional directors, line managers or no one has overall responsibility at all. It is not essential to have the chief executive in charge of environmental risk but if he or she is not, there must be clear lines of accountability and appropriate channels through which problems can be elevated and discussed.
! Environmental risk does not stop at the company walls. Our survey suggests that one of the main weaknesses among corporates with this aspect of risk is a lack of scrutiny into the environmental performance of partners and suppliers. Given the number and geographical range of the external partners with whom companies collaborate, it is essential that they consider environmental risk not just within their own organisation, but also among those with whom they work. They must ensure that they ask the right questions when evaluating poten-tial partners, but the process should not end there. It is just as important to monitor environmental performance on an ongoing and regular basis.
! Environmental risks can also be a source of oppor-tunity. In the coming years, it is almost certain that environmental risk will rise up the corporate agenda as concern about climate change and the impact of business on the environment increases. This presents challenges for companies, but it also offers opportunities. Depending on their industry, companies may be able to develop products or services that offer better environmental perform-ance than those of their competitors, or that help to address some of the risks that companies are now facing.
© The Economist Intelligence Unit 2008 11
Appendix Under the spotlight
The transition of environmental risk management
Appendix: Survey results
How significant a threat do the following risks pose to your company's global business operation today? Rate on a scale of 1 to 5, where 1=Very high risk and 5=Very low risk.(% respondents; Charts shows responses 1 and 2 on scale only)
Financing risk (difficulty raising finance)
Credit risk (risk of bad debt)
Market risk (risk that the market value of assets will fall)
Foreign exchange risk (eg, risk that exchange rates may worsen)
Country risk (problems of operating in a particular location)
Regulatory risk (problems caused by new or existing regulations)
IT risk (eg, loss of data, outage of data centre)
Political risk (danger of a change of government)
Crime and physical security
Terrorism
Reputational risk (eg, events that undermine public trust in your products or brand)
Natural hazard risk (eg, climate change, hurricanes, earthquakes)
Human capital risks (eg, skills shortages, succession issues, loss of key personnel)
Environmental risk
16 35
19 31
24 25
14 31
14 31
12 26
11 25
11 23
9 24
10 16
4 20
3 20
6 15
5 15
Very high risk High risk
(% respondents)
In each of the following regions, are the majority of risks to your business considered to be general(eg, likely to affect many other companies operating in the same location or industry) or specific(eg, relating to your company’s internal systems, processes or people)?
Africa/Middle East
Asia Pacific
Eastern Europe
Western Europe
North America
Latin America
Don’t know/Not applicableGeneral Specific
361846
172558
212158
341848
232453
331751
12 © The Economist Intelligence Unit 2008
Appendix Under the spotlight The transition of environmental risk management
(% respondents)
How has your organisation's assessment of risk in each of the following countries and regions changed over the last three months?
Canada
USA
France
Germany
UK
Other Western Europe
Russia
Other Eastern Europe
China
India
Japan
Rest of Asia Pacific
Latin America
Overall global risk
Middle East
5 56
23 38
11 29
12 24
7 28
7 25
5 22
3 25
2 25
3 20
3 19
2 19
2 18
2 14
8 30
Significant increase in risk Slight increase in risk
Executive management
Regulators
Government
Customers
Employees
Non-governmental organisations
Investors
Local communities
Non-executive management
Partners and suppliers
Which of the following stakeholders currently exerts the most pressure on your company to improve environmental risk management? Select all that apply.(% respondents)
23
15
13
11
9
8
8
7
5
1
Better reputation among customers
Better reputation among investors
New business opportunities
Greater operational efficiency
Enhanced competitive positioning
Improved shareholder value
Stronger ability to attract and retain employees
Improved relations with regulators
Increased profitability
Reduction in overall carbon footprint
Enhanced ability to influence government policy
What are the biggest benefits that your company expects to derive from more effective environmental risk management? Select up to three.(% respondents)
59
30
28
27
27
20
18
18
17
12
11
© The Economist Intelligence Unit 2008 13
Appendix Under the spotlight
The transition of environmental risk management
223
238
4827
4712
(% respondents)
What change has there been to the amount of attention and financial resources that your company dedicates to environmental riskin the past three years, and what change do you expect in the next three years?
Past three years
Next three years
Significant increase Slight increase No change Decrease
138 3
357
4513
337
(% respondents)
What change has there been to the scale of your overall environmental liabilities over the past three years, and what change do youexpect in the next three years?
Past three years
Next three years
Significant increase Slight increase No change Slight decrease Significant decrease
Significant increase
Slight increase
No change
Slight decrease
Significant decrease
In the past three years, what change has there been to the amount of time the board spends on discussing environmental issues? (% respondents)
14
47
37
2
0
Developed new products or services to help address environmental problems
Considered environmental/climate issues at Board level
Engaged/trained employees on environmental risk issues
Conducted review of insurance policies to protect against environmental risk
Set targets for reducing carbon emissions
Engaged with non-governmental organisations to implement and assessenvironmental policy
Set environmental standards and controls for suppliers to meet
Conducted scenario planning to consider potential impact of climate change
Implemented an internationally recognised framework for reportingenvironmental performance
Conducted a review of carbon offsetting activities to manage reputational risk
Developed a climate change strategy
Cancelled or postponed new investment because of concerns aboutenvironmental risk
Terminated supplier/partner relationship because of concerns aboutenvironmental risk
Received external assurance over environmental performance
None of the above
Over the past three years, which of the following initiatives has your company undertaken to improve its management of environmental risk? Select all that apply.(% respondents)
35
31
31
26
22
21
20
19
17
15
12
11
9
8
18
14 © The Economist Intelligence Unit 2008
Appendix Under the spotlight The transition of environmental risk management
257
215
316
194
2111
185
349
2811
3714
3011
3613
(% respondents; Charts shows responses 1 and 2 on scale only)
How successfully do you think your company manages the following aspects of environmental risk?Rate on a scale of 1 to 5, where 1= Very successfully and 5=Not at all successfully.
Identifying environmental liabilities
Assessing scale and scope of environmental liabilities
Dealing with environmental regulations
Exploiting opportunities arising from changing public perception of environmental issues
Increasing energy efficiency
Applying hedging contracts to transfer environmental risks
Reporting on environmental performance to investors
Optimising supply chain to reduce carbon emissions
Understanding impact of climate change on business locations
Due diligence of partners' and suppliers' environmental performance
Decisions over environmental risks to bear, transfer or manage
Very successfully Successfully
155
185
238
2820
3627
2211
167
259
3418
236
2615
308
3317
(% respondents; Charts shows responses 1 and 2 on scale only)
How significant a concern are the following issues associated with environmental risk for your company?Rate on a scale of 1 to 5, where 1=Very significant concern and 5=No concern at all.
Potential for extreme weather events
Industrial pollution
Water scarcity
Impact on biodiversity
Potential impact of climate change over long term
Failure to meet reporting obligations
Failure to meet emissions targets
Failure to comply with environmental regulation
Rising energy and fuel prices
Damage to reputation and brand
Accessibility of raw materials due to extreme weather events
Over/under payment of environmental taxes
Carbon trading losses
Very significant concern Significant concern
© The Economist Intelligence Unit 2008 15
Appendix Under the spotlight
The transition of environmental risk management
3715
477
4012
428
3211
384
216
328
304
(% respondents; Charts shows responses 1 and 2 on scale only)
How successfully does your company manage the following environmental risks related to its supply chain?Rate on a scale of 1 to 5, where 1= Very successfully and 5=Not at all successfully.
Emissions from transportation
Emissions from factories, warehouses and other facilities
Disruption to supply chain from extreme weather events
Impact of manufacturing or other operations on local communities
Water scarcity
Air pollution
Transportation of hazardous chemicals or waste
Water pollution
Potential use of toxic/hazardous substances in manufacture
Very successfully Successfully
41142359
51130459
(% respondents)
How would you rate the following aspects of managing supply chain risk in your organisation?Rate on a scale of 1 to 5, where 1= Very significant and 5=Not at all significant.
Degree of visibility and transparency regarding the interdependencies of risk across our supply chain
Level of dependency on technology to manage supply chain related risks
1 Very significant 2 3 4 5 Not at all significant
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Appendix Under the spotlight The transition of environmental risk management
Chief executive officer
No one has overall responsibility
Don’t know
Who in your company has overall responsibility for managing environmental risks? (% respondents)
24
Chief risk officer19
Chief sustainability/corporate social responsibility officer10
Chief legal officer/general counsel3
Chief financial officer4
Heads of business units12
Regional directors3
Line managers2
14
7
Other, please specif3
Use of more fuel-efficient vehicles
Collaboration with logistics providers
Defined risk indicators / risk thresholds for environmental risk withinthe supply chain
Implementing third-party audit of suppliers and partners
Use of route optimisation technology
Made formal assessment of interdependencies of environmental riskacross the supply chain
Introducing redundancy into supply chain
Increased use of "nearshoring"
Relocation of factories, warehouses and other businesses
Implemented formal process to assess environmental liabilities withinthe supply chain
Mandating suppliers to disclose carbon footprint
What is your company doing to improve the management of its supply chain in light of these risks? Select all that apply.(% respondents)
20
16
14
13
13
11
9
8
8
8
7
External factors
Internal (enterprise) factors
Partner factors
What types of supply chain risks do you perceive as having the potentially greatest environmental impact to your organisation? (% respondents)
39
32
29
Initiatives to mitigate environmental impact of products and services
Materials used
Waste to landfill and recycling
Greenhouse gas emissions
Emissions targets and progress on reaching those targets
Total water withdrawal
Impact of activities, products and services on biodiversity
Emissions of ozone-depleting substances
None of the above
Other, please specify
Which of the following indicators does your company use in its formal environmental reporting? Select all that apply.(% respondents)
30
28
22
20
16
15
15
11
33
3
In an ad hoc way
In a co-ordinated way as part of an overall risk management framework
In a co-ordinated way, but separate to the overall risk management framework
Not at all
How is environmental risk managed in your organisation? Please select the answer that is most appropriate.(% respondents)
33
31
26
10
© The Economist Intelligence Unit 2008 17
Appendix Under the spotlight
The transition of environmental risk management
Formal due diligence to assess environmental liabilities
Formal assessment of compliance with environmental legislation
Assessment of long-term liabilities related to climate change
Formal assessment of environmental exposure within supply chain
None of the above
When planning an acquisition, which of the following steps do you take to evaluate environmental exposure of your target? Select all that apply.(% respondents)
38
35
21
19
37
Lack of certainty about impact of environmental liabilities
Lack of regulatory harmonisation between regions
Cost of managing environmental risks
Difficultly establishing benchmarks of key performance indicators
Constantly changing regulations
Tendency for issue to be overly emotive
Potential for liabilities to be hidden within supply chain
Complexity of supply chain/partner relationships
Lack of awareness among employees of liabilities
Commitment from senior management
Lack of awareness among employees of legislation
Uncertainty over carbon price
Which of the following factors most hinder your ability to manage environmental risk? Please select up to three.(% respondents)
35
34
30
28
23
20
19
18
18
18
15
10
Developing new products and services
Marketing new product or service
Selection of suppliers and partners
Selecting new business location
Planning geographical expansion
Planning market expansion
Planning mergers and acquisitions
None of the above
In which of the following business activities does your company conduct a formal consideration of environmental risk? Select all that apply.(% respondents)
41
32
32
28
26
23
19
21
7
9
17
17
27
32
34 14
26 15
(% respondents)
How significant does your company view the opportunities and risks associated with climate change?Rate on a scale of 1 to 5, where 1= Very significant and 5=Not at all significant.
Opportunity
Risk
1 Very significant 2 3 4 5 Not at all significant
Global reporting initiative
Eco-management and audit scheme
Carbon disclosure project
Greenhouse gas protocol
Sector specific guidelines, please specify
In your reporting, do you apply any of the following guidelines? Select all that apply.(% respondents)
27
23
16
11
7
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Appendix Under the spotlight The transition of environmental risk management
About the respondents
Asia-Pacific
North America
Western Europe
Eastern Europe
Middle East and Africa
Latin America
In which region are you personally based? (% respondents)
31
30
22
7
6
4
Financial services
Professional services
Energy and natural resources
Government/Public sector
IT and technology
Manufacturing
Construction and real estate
Healthcare, pharmaceuticals and biotechnology
Telecommunications
Education
Transportation, travel and tourism
Agriculture and agribusiness
Entertainment, media and publishing
Consumer goods
Chemicals
What is your primary industry?(% respondents)
41
9
9
7
7
5
3
3
3
3
2
2
2
2
1
Which of the following best describes your title? (% respondents)
Board member4
CEO/President/Managing director14
CRO4
CFO/Treasurer/Comptroller10
CIO/Technology director2
Other C-level executive8
SVP/VP/Director15
Head of business unit6
Head of department7
Risk manager17
Other manager9
Other3
© The Economist Intelligence Unit 2008 19
Appendix Under the spotlight
The transition of environmental risk management
Risk
Finance
Strategy and business development
General management
Operations and production
IT
Marketing and sales
Customer service
Information and research
R&D
Procurement
Legal
Supply-chain management
Human resources
Other
What are your main functional roles? Please choose no more than three functions.(% respondents)
56
36
27
27
9
8
7
6
6
6
4
3
2
2
5
Yes
Do you have responsibility for, or influence over, strategic decisions on risk management in your company? (% respondents)
100
$500m or less
$500m to $1bn
$1bn to $5bn
$5bn to $10bn
$10bn or more
What is your organisation's global annual revenue in US dollars? (% respondents)
42
12
13
9
24
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